The Political Economy of Foreign Direct Investment: A Framework for Analyzing Investment Laws and Regulations in Developing Countries

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Introduction

The Political Economy Paradigm

The governments of most developing countries continue to express a desire to stimulate and guide the socioeconomic development of their nations. To achieve this goal of state promoted and directed development, governments have intervened in their economies either directly, by controlling public enterprises,(1) or indirectly, by regulating the private sector through the legal system. Believing that private investments will contribute to the desired expansion of national output, these governments have resorted to a variety of schemes to induce private-sector firms, both foreign and domestic, to become more involved in the economy.(2) The role of private investment in the economic growth and development of the host countries and the impact of investment regimes on capital in-flows are issues that remain unresolved in the literature on private direct investments in Africa.(3)

Although a significant amount of empirical work has been done on the link between foreign direct investment (FDI)(4) and economic growth and development,(5) comparatively little attention has been paid to the effect that investment laws and regulations have on the amount of private capital actually invested.(6)

Studies of the legal aspects of doing business in developing countries have primarily focused on the details of the legal regimes governing foreign direct investment.(7) This approach has increased our understanding of the legal and regulatory framework within which private investors operate, yet it has failed to illustrate whether - and if so, how - the legal regime for foreign private investments has increased the capital levels in the host-country's economy or has promoted other significant governmental objectives for the economy.

Current legal writing on the regulatory environment for FDI in developing countries suffers from other deficiencies as well. In the first place, the studies on the legal aspects of doing business tend to be country-specific, and their general utility is thus somewhat limited.(8) Second, they offer little or no help toward developing a broad-gauged theory of FDI.(9) Given their emphasis on legal rules and regulations, rather than the social substructure underpinning the rules, these studies make no attempt to explore the interplay between such rules and other extraneous factors that also influence the flow of FDI. Finally, the legal environment of FDI traditionally has been studied and analyzed without consideration of the broader political economy context, ignoring the latter's influence on the former. Realistically, however, the law is inextricably interwoven with economics.(10) Therefore, the coexistence of law and the economy must be defined and described, rather than ignored because it lies outside the province of routine legal analysis.

The flaws in FDI scholarship need not detract from the important fact that policymakers in developing countries are acutely aware of the need for substantial capital formation if they are to develop into modern, technically advanced industrial societies.(11) The availability of significant amounts of capital played a prominent role in the early stages of industrialization in Europe (especially in England); the United States and Canada; the primitive "socialist" development process (for example, in the former Soviet Union); and, through the Marshall Plan, in the reconstruction of a war-ravaged Europe and Japan(12) in the late 1940s. Clearly, capital accumulation also stands to play an equally significant role in the industrialization of Africa.(13) In Africa, as elsewhere, in addition to domestic capital accumulation, development would greatly benefit from both private and public external capital inflows.(14)

Recognizing the potential benefits of FDI,(15) developing countries have enacted various kinds of investment legislation in the last two decades. The newer investment laws, together with related development legislation and assorted policy statements, have generally had as a basic objective the improvement of the environment for FDI. …